Plantation Sector - Removal of GSP to hurt oleochemical producers OVERWEIGHT

- According to the Edge Financial Daily, Malaysia will lose its Generalised Scheme of Preferences (GSP) status in the European Union (EU) from January 2014 onwards, a measure that will lead to higher taxes on palm oil exports.

- The existing GSP offers developing countries duty reductions of up to 66%. But the EU has removed Malaysia from its list as the country is deemed an upper middle income nation.

- According to Kuala Lumpur Kepong Bhd’s (KLK) CEO, Tan Sri Lee Oi Hian, some Malaysian oleochemicals entering the EU will be taxed between 4% and 6% without the GSP. Tan Sri Lee also said that Malaysian Government should put the Free Trade Agreement (FTA) with the EU on a faster burner and try to resolve some of these issues.

- This is not positive for Malaysian oleochemical companies as it would erode their competitiveness against the Indonesian producers when exporting to the EU. Due to the export tax rate system, the Indonesian producers already have a small competitive advantage. The other major export market for oleochemicals is China.

- Producers of oleochemicals in Malaysia include Sime Darby, IOI Corporation and KLK. The negative impact to KLK is partly mitigated by the group’s operations in EU. As for IOI, its oleochemical plants are located in Malaysia currently. However, the group is planning to develop a US$710mil palm oil processing plant in Xiamen, China, which we believe may include an oleochemical plant.

- Since KLK already has some oleochemical operations in EU, these should not be affected by the removal of the GSP.

- We estimate that EU accounts for 22% of KLK’s total oleochemical production capacity currently. KLK has about 250,000 tonnes of production capacity in EU per year. Upon completion of an additional 100,000 tonnes/year capacity at KLK Emmerich, KLK would have 350,000 tonnes/year of capacity in EU. We estimate the production capacity of the group’s oleochemical operations in Malaysia and China at 720,000 tonnes/year and 187,000 tonnes/year each.

- By year-end, KLK would have better competitive advantage due to the completion of its three refineries and an oleochemical plant in Indonesia. The group is expected to start operations of its refinery in Belitung in the coming few months while the other two refineries and the oleochemical plant are envisaged to commence operations by year-end.

- The oleochemical plant in Dumai is anticipated to command production capacity of 165,000 tonnes/year. In total, KLK would have refining capacity of 3,600 tonnes/day in Indonesia.

Source:. AmeSecurities